Whether informal committees must comply with the disclosures mandated by Rule 2019 of the Federal Rules of Bankruptcy Procedure is a very hot litigation topic and the subject of no fewer than six decisions in the last three years. The cases are providing contradictory answers and, unless legislative reforms occur, raise the potential for circuit splits at the appellate level.
Rule 2019 provides that “except with respect to a committee appointed pursuant to §1102 or 1114 of the Code, every entity or committee representing more than one creditor or equity security holder and, unless otherwise directed by the court, every indenture trustee, shall file a verified statement setting forth” various pieces of information. These pieces include (1) the amount of each claim that each member holds, (2) the date that the claim was acquired and (3) the purchase price paid for such claims. Creditors who purchase claims typically prefer not to make such disclosures, if for no other reason than reluctance to make public the price that claims traders pay for a claim.
The issue at its most basic level is whether the members of an informal committee must disclose various pieces of information listed above (official committees do not have to comply with Rule 2019). Larger chapter 11 cases, however, often have one or more unofficial committees. Those committees often contain members (e.g., hedge funds) that acquired claims for strategic purposes. Other parties in the case sometimes request that the bankruptcy court force the members of the unofficial committees to comply with Rule 2019.
This issue is one of the hottest in our field. As recently as four years ago, there was no jurisprudence to speak of on whether Rule 2019 applies to ad hoc committees. The half-dozen decisions that have since been issued are not only evenly split on the issue, but there is also a split among the decisions from the U.S. Bankruptcy Court for the District of Delaware. There are numerous articles discussing the question,[1] and there is even a rule change pending. We can expect this to be a hot issue for at least the next year or two.
The issue first arose three years ago when two judges in different courts came to opposite conclusions in their interpretation of the scope of Rule 2019. In February 2007, Hon. Allan L. Gropper of the Southern District of New York ordered an ad hoc committee in the Northwest Airlines case to make the disclosures required by Rule 2019. The following month, he denied a motion to make the disclosures under seal so that only the bankruptcy court and U.S. Trustee could view the information. In the latter decision, Judge Gropper explained that “Rule 2019 is based on the premise that the other shareholders have a right to information as to Committee member purchases and sales so that they make an informed decision whether this Committee will represent their interests or whether they should consider for a more broadly-based committee of their own.” In re Northwest Airlines Corp., 363 B.R. 704, 709 (Bankr. S.D.N.Y. 2007).
Shortly thereafter, in April 2007, Hon. Richard S. Schmidt of the Southern District of Texas summarily denied a motion to compel an ad hoc noteholder group to comply with Rule 2019 in the Scotia Development LLC case. The two-page order only hints at Judge Schmidt’s reasoning, except that he found that the noteholder group was “not a ‘committee’ within the meaning of Bankruptcy Rule 2019.” In re Scotia Development LLC, Case No. 07-20027-C-11 (Bankr S.D. Tex. April 18, 2007). Then came the small explosion of conflicting decisions from the mid-Atlantic starting late last year. There were four reported decisions—three from Delaware and one from the Eastern District of Pennsylvania—within the span of two months that again produced an even split of authority.
Hon. Mary Walrath of the District of Delaware issued the first of the four in December 2009 with her opinion in In re Washington Mutual Inc., Case No. 08-12229 (MFW) (Bankr. D. Del. 2009). In Washington Mutual, a secured creditor had moved the bankruptcy court for an order forcing an ad hoc group of noteholders to comply with Rule 2019. The noteholders responded by denying that they were a committee, representing that they were a “loose affiliation” and that their members could be bound only through their unanimous consent. Judge Walrath nevertheless concluded that the group was just an ad hoc committee without the name. She based her decision on three specific factual findings. First, that the group contained multiple creditors with similar claims; second, the group filed pleadings collectively rather than separately; and third, that the group had retained counsel collectively. Judge Walrath concluded that the ad hocnoteholders group was really a committee and must comply with Rule 0219.
The following month, two more conflicting decisions came from Delaware. First in Premier International Holding, Inc., Case No. 09-12019 (CSS) (Bankr. D. Del. 1/20/2010) (a/k/a Six Flags), Hon. Christopher Sontchi concluded that an informal committee of bondholders was not a “committee representing more than one creditor” within the meaning of Rule 2019. In Six Flags, the creditors’ committee had sought to compel a noteholders’ committee to comply with Rule 2019. Judge Sontchi ruled that under the “plain meaning” of Rule 2019, the noteholders’ committee was not a committee because the Oxford English Dictionary definition of “committee” says that a committee is a “body of two or more people appointed for some special function” [emphasis original]. According to Judge Sontchi, because the noteholders committee was ad hoc and unofficial, it was not really a committee at all. Furthermore, the Oxford English Dictionary defines to “represent” as to “take the place of (another); be a substitute in some capacity for; act or speak for another by disputed right.” Thus, because the bondholder committee was only representing itself, not only was the committee not a “committee,” but it wasn’t representing any other creditors, either.
Two days later, Hon. Brendan L. Shannon issued an order coming to the exact opposite conclusion. In the case of Accuride Corporation, Judge Shannon issued a two-page order requiring an ad hoc noteholder group to comply with Rule 2019 and prohibiting further participation in the case until doing so. In re Accuride Corporation, Case No. 09-13449 (BLS) (Bankr. D. Del. Jan. 22, 2010). In such a short document, Judge Shannon could not provide detailed reasoning for his decision, but it might be fair to assume that his reading of the plain language of Rule 2019 differed at least slightly from Judge Sontchi’s reading.
Finally, mere weeks later and slightly farther north, Chief Judge Stephen Raslavich of the Eastern District of Pennsylvania had the first opportunity to make a ruling on the issue while aided by the previous decisions. In the Philadelphia Newspapers case, the debtors sought Rule 2019 compliance from a “Steering Group of Pre-petition Lenders.” In re Philadelphia Newspapers LLC, Case No. 09-11204 (Bankr. E.D. Pa. Feb. 4, 2010). In a lengthy opinion, Judge Raslavich concluded that Rule 2019 did not apply to the lenders’ group on much the same basis as Judge Sontchi had ruled a few weeks earlier. Since the Bankruptcy Code does not define terms such as “committee” and “representing more than one creditor,” courts must resort to “ordinary meaning” or “common usage” to define them. Judge Raslavich consulted Black’s Law Dictionary and noted that an “entity” is an organization that has a legal identity apart from its member or owners and that a “committee” is a “subordinate group to which a deliberative assembly or other organization refers business.” Because the lenders’ group had appointed itself and was only representing the interests of its members, Judge Raslavich concluded that the group did not fit within the criteria of Rule 2019 as currently drafted.
With this backdrop of learned judges reading the same language and coming to diametrically opposite conclusions, the Committee of Rules and Practice and Procedure of the Judicial Conference circulated a revised version of Rule 2019 for comment. Remarkably, the revision began circulating in August 2009, before four of the six decisions discussed here occurred. The revised version of Rule 2019 would expand the scope of disclosures to committees that consist of more than one creditor or equity security-holder as well as to any group of creditors or equity security-holders that act in concert to advance a common interest.
1.See, e.g., Michael DeMarino, “Rule 2019: The Debtor’s New Weapon,” 42 J. Marshall L. Rev. 165 (Fall 2008); Kevin J. Coco, “Empty Manipulation: Bankruptcy Procedure Rule 2019 and Ownership Disclosure in Chapter 11 Cases,” 2008 Colum. Bus. L. Rev. 610; James M. Shea, Jr., “Who is at the Table? Interpreting Disclosure Requirements for Ad Hoc Groups of Institutional Investors Under Federal Rule of Bankruptcy Procedure 2019,” 76 Fordham L. Rev. 2561 (April 2008); Sparkle L. Alexander, “The Rule 2019 Battle: When Hedge Funds Collide with the Bankruptcy Code,” 73 Brooklyn L. Rev. 1411 (2008); and Evan D. Flaschen and Kurt Mayr, “Ad Hoc Committees and the Misuse of Bankruptcy Rule 2019,” 16 Bankr. L. & Prac. 6 Art 3, p.4 (December 2007).